Energy Efficiency Obligation Schemes: Policy guidelines
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Energy Efficiency Obligation Schemes:
Policy guidelines
Deep Dive on Key Policy Mechanism That Can Be Deployed
under Article 7 of the Energy Efficiency Directive
Prepared jointly by the European Bank for Reconstruction and Development
and the Energy Community Secretariat
February 2019*
With the assistance of
*This guideline was published in November 2018 and updated in cooperation with the European
Commission in February 2019.
CONTENTS
Introduction ............................................................................................................................................1
1. History of EEOs ...............................................................................................................................2
2. Status of EEOs in EBRD and Energy Community Contracting Parties ........................................2
3. Key components of EEO schemes ................................................................................................3
3.1. Component 1: Legal and regulatory framework...................................................................4
3.2. Component 2: Scheme administration .................................................................................7
3.3. Component 3: Obligated parties delivery mechanisms / business models.......................9
4. Perspective on EEO scheme roll-out in EBRD and Energy Community region ........................ 13
4.1. Experience to date .............................................................................................................. 13
4.2. Common challenges ........................................................................................................... 14
4.3. Recommendations for getting started ............................................................................... 16
5. EEOs place in the policy measure mix for meeting the national energy savings target provided
in EED Article 7.................................................................................................................................... 18
5.1. The contribution of EEO schemes towards the 2020 Article 7 obligation ...................... 18
5.2. The future role of EEO schemes in the Article 7 policy measure mix .............................. 18
5.3. Selecting an effective and coherent policy mix for Article 7 ............................................ 18
Acknowledgements ............................................................................................................................. 20
ANNEX A: Detailed overview of EEO schemes in EBRD COOs / Energy Community Contracting
Parties .................................................................................................................................................. 21
ANNEX B: Case study on Ireland’s EEO scheme ............................................................................... 24
Introduction regulatory impact assessment for the
Energy Efficiency Obligation (EEO) schemes amended EED1.
are a legislative mechanism that places
Under Article 7 of the EED, EU countries and
requirements on ‘Obligated Parties’ (OPs) to
Energy Community Treaty Contracting Parties
meet quantitative energy savings targets
must achieve and set a cumulative end-use
across their customer portfolio. OPs may be
energy savings target that has to be achieved
retail energy sales companies, energy
by 31 December 2020 either through an EEO
distributors, transport fuel distributors,
scheme, one or more ‘alternative policy
and/or transport fuel retailers. Globally, the
measures’ of the MS choice, or a
amount of finance mobilized for EE measures
combination of the EEO scheme and
by EEO schemes has grown from
alternative policy measures.
approximately 5 billion USD to more than 25
billion USD per year between 2005 and 2015 The cumulative end-use energy savings
(IEA, 2017). obligation for EU countries is equivalent to
new yearly energy savings from 2014-2020
EEOs are market-based instruments that do
of 1.5% of a reference quantity, taken as the
not prescribe the measures to be deployed –
annual energy sales to final customers
OPs are given the freedom to choose the
averaged over the three-year period 2010-
measures and delivery routes that work best
2012 and adjusted for certain allowances.
for them within the constraints defined by the
The corresponding obligation for Energy
scheme administrator. As a result, this
Community Contracting Parties is to achieve
instrument allows the market as a whole to
a cumulative energy savings obligation
discover the most cost-effective way to
equivalent to new yearly energy savings from
achieve energy savings in that particular
2017-2020 of at least 0.7% of the average
context.
annual energy sales to final customers taken
Article 7 of the Energy Efficiency Directive from a reference period of 2013-2015 and
2012/27/EU (the “EED”) plays a central role adjusted for similar allowances.
in the package of measures being delivered
This requirement has stimulated a number of
by the European Union (EU) to achieve a 20%
EU Member States to set up EEO schemes
improvement in energy efficiency (EE) by
and the measure is expected to contribute
2020. The importance of Article 7, which
the greatest share of energy savings in
requires Member States (MS) to set
delivering the 2020 target, and likewise be of
quantified energy savings targets for the
central importance when looking forward to
respective obligation period (2014-2020),
2030.
has been further reinforced in the revised
EED (Directive (EU) 2018/2002 on energy Given this take-up of new EEO schemes
efficiency, "amended EED") which sets a among EU Member States, their potential
legislative pathway to 2030 and beyond. The applicability within Energy Community
scope of the energy savings obligation has Contracting Parties for meeting their own
been a key focus both in negotiations Article 7 targets both to 2020 and beyond to
regarding the 2030 headline targets and in 2030 is under serious consideration.
the European Commission’s associated Ensuring that any such implementation takes
into account the lessons learnt and best
1 cuments/1_en_impact_assessment_part1_v4_0
https://ec.europa.eu/energy/sites/ener/files/do .pdf
1
practices and is appropriate to the market in competitive market structures. This was
question is therefore of primary concern. particularly true for GB and France where the
obligation was placed on unbundled retail
As a financial institution, the EBRD is suppliers of electricity and gas – in the case
interested in EEOs for the potential to open of GB with unregulated tariffs.
new financing pathways for energy efficiency
improvement measures. The Energy Further expansion of EEOs within the EU has
Community Secretariat (ECS), responsible for been largely driven by the requirement of EED
extending the EU internal energy market rules Article 7. Ireland, Austria, Slovenia, Bulgaria,
and principles to its Contracting Parties, is Luxemburg, Poland, Greece and Malta have
interested in EEOs as a means for countries all responded by setting up their own
to achieve Article 7 obligations of the Energy schemes, with the focus on retail entities as
Efficiency Directive. Given the common the Obligated Parties.
interest in EEO roll-out amongst respective
countries, EBRD and ECS have jointly Elsewhere, EEOs have been implemented in
developed these Policy Guidelines to support Asia, Australia and South America to bring an
countries in their decision-making as to the estimated total of 46 operational schemes by
most appropriate policy mix for achieving the 2017 4 . While they vary hugely in terms of
required end-use energy savings under scope, focus and design, they all meet the
Article 7 of the EED. essential definition of an EEO as a regulatory
mechanism that requires Obligated Parties to
1. History of EEOs meet quantitative energy savings targets by
EEO schemes began life in the United States delivering or procuring eligible end-use
(US) as part of a drive towards Integrated energy savings. The IEA estimates that
Resource Planning following the oil crises of together these schemes stimulated around
the 1970s, by seeking to consider energy 26 billion USD (21 billion EUR) of additional
efficiency as part of a holistic least-cost investment in energy efficiency in 2015 (with
approach to energy sector planning 2 . The around 40% of those costs being met directly
positive results have seen the popularity of by the Obligated Parties)5.
the schemes broaden across the US with the
IEA counting 24 operational EEO schemes
2. Status of EEOs in EBRD and
now in place3. Energy Community Contracting
Parties
In the EU, four countries (GB, Denmark,
In response to the amount of energy savings
France and Italy) followed by implementing
required by Article 7, EEO schemes have
EEO schemes in the 1990’s and early
been adopted, are in the process of being set
2000’s. While the US schemes were
up, or are under consideration in several
dominated by vertically-integrated markets
EBRD Countries of Operation (COOs) or
with utility firms enacting measures within
Energy Community Contracting Parties. This
their own customer base, the EU examples
is summarized in Figure 1 below.
demonstrated the applicability of EEOs to
2Fawcett T., Rosenow J. and Bertoldi P. (2017), 3 International Energy Agency (2017), Market-
The future of energy efficiency obligation Based Instruments for Energy Efficiency: Policy
schemes in the EU, European Council for an Design and Choice.
Energy Efficiency Economy. 4 ibid
5 ibid
2
Figure 1 – Status of EEOs in EBRD and Energy Community countries. See Annex A for full details.
The 2020 deadline is fast approaching and 3. Key components of EEO
therefore little time remains to establish new
schemes
EEO schemes which will make a significant
Many EBRD and Energy Community
contribution towards the national energy
Contracting Parties, despite having the
saving targets under Article 7. It is noted as
intention to adopt an EEO, are facing
a “key policy” beyond 2020, with targets
challenges putting in place an effective
retained and expected to contribute around
scheme. This section summarizes the main
half the additional savings targeted by the EU
components of an EEO scheme and
by 2030. The amended EED extended the
international best practice considerations
energy savings obligation to achieve new
when putting in place an EEO. These include
annual energy savings of at least 0.8% (of
an adequate legal framework, scheme
final energy consumption for all MS, but
administration (institutional structures and
Cyprus and Malta (0,24%)) during the next
capacities, operational methodologies, M&V
period 2021-2030 and beyond, coming from
systems) and obligated party delivery models
new energy efficiency renovations or other
(delivery mechanisms, funding / financing
measures in end-use sectors (~13% more
products, methodologies, organisational
ambitious than in the period 2014-2020).
strategies, monitoring and verification
Member States will likely retain the option of systems). It then highlights key issues /
using alternative measures in place of an considerations in the context of EBRD COOs
EEO scheme although the scale of savings and Energy Community Contracting Parties
required is expected to encourage the further particular circumstances. Annex B provides a
roll-out of EEOs across the Union. case study of the Irish EEO scheme which
3
reflects many of the best practice guidelines ministry and the regulator to develop
described by the components. associated secondary legislation and put in
place the governance structure concerning
3.1. Component 1: Legal and quality control and assurance, scheme
regulatory framework processes and enforcement, and co-
The obligation itself is typically required to be ordination. This includes empowering the
stipulated in effective primary law which also energy regulators to be able to exercise their
empowers relevant entities to establish and powers in the area of energy efficiency if
exercise the necessary secondary legislation necessary.
for implementation. The primary law is
usually an energy law, or dedicated EE law. Secondary legislation should then “fall-out”
There is substantial variety in the detail of of the obligations stipulated in the primary
scheme design stipulated in the primary law legislation and build upon its enabling
but in many cases it covers at least a powers. With respect to an EEO scheme, this
description of scheme targets, fuel coverage, may be expected to define the operational
responsibilities of different agencies and processes of the scheme and relevant
empowering the levy of penalties for non- responsible entities as well as describe the
compliance of all relevant provisions. content and structure for associated
Secondary legislation may then be used to regulations (tertiary legislation), such as
describe specific methodologies regarding calculation methodologies, and lead to their
the savings target, definition of penalty rates, development.
calculation of energy savings attributable to a
There exists an extensive body of literature
given measure, and monitoring and
describing the scope, options, relative
verification (M&V) responsibilities.
advantages and potential pitfalls of various
At what level and to what detail within the design choices in the establishment of an
legislative framework the various aspects of EEO scheme. The table below provides a
the scheme design are described will in part summary overview.
be driven by the norms of the legal systems
The business model (see Component 3) is
for the country in question. At a minimum
directly shaped by the regulatory framework.
primary legislation (typically either within the
Often, policy makers neglect to take into
Energy Law or a dedicated EE Law) will
account the limitations on business models
empower enforcement and allocate
imposed by market maturity (or lack thereof).
implementing responsibilities by laying out
This can lead to regulatory frameworks that
the institutional framework together with the
impose overly onerous constraints on
roles and responsibilities of each relevant
obligated parties, leading to inaction.
entity. It will give powers to the relevant
Table 1: Summary table of components related to an EEO legal and regulatory framework
Component Typical Best-practice considerations (success Country examples
responsible factors / potential pitfalls)
Defining Line Ministry • Defined in primary legislation Austria (Article 10 of EE
Obligated • Ensure OPs are identifiable Law)
Parties (consider starting with only Croatia (Article 13 of EE
electricity/gas) Law)
• Set a minimum threshold for the Greece (Article 9 of EE
obligation to apply Law)
4
Defining the Line Ministry • Targets should be clear and Slovenia/Latvia – build
size of the (supporting predictable by OPs target
target methodology • Start at realistic level to gain Bulgaria – unpredictable
and analysis confidence targets
by scheme • Targets should not result in increase Austria – clear
administrator in tariffs of >2% check ex-ante in communication on
6) benefits
an RIA7 and monitor ex-post
• Should be accompanied by clear
communication of scheme benefits
to consumers
Compliance Line Ministry • Must be sufficient to demonstrate GB/France/Ireland – 3 to
periods and political commitment 4 year compliance
scheme • Longer compliance periods provide periods
duration flexibility and clarity
• Limited banking/borrowing within
compliance periods helps with
flexibility
Methodology Line Ministry • Proportionate to sales volumes Ireland/Austria –
for setting (support from • Consider lifetimes (lifetime targets Cumulative target
targets scheme or cumulative annual targets) GB/France – Lifetime
administrator) • Accredit all savings from a measure target
to OP if contribution is material
irrespective of leverage level
Cost-recovery Regulator • In liberalised markets should be GB/Ireland/Austria/Slove
mechanism treated as cost of doing business nia – cost of doing
• Regulated tariffs should explicitly business
enable cost recovery (typically as Denmark/Italy/France –
opex) regulated tariffs
• Start with standard cost-pass New York – PBI
through arrangement then consider mechanism
performance-based incentive (PBI)
Defining Administrator • Allow savings in all major fuel Slovenia – issues in
eligible (principles sources counting of solar PV and
measures defined by • Only count end-use energy savings eligibility
Line Ministry) (careful on RES applications) GB – route for OPs to
• Allow a route for OPs to propose new propose measures
measures
Calculation Administrator • If possible, hold methodologies France/GB – deemed
methodologies (with separate from formal legislation to savings lists held
technical ease updating process separately
support) • Need to consider issues of Poland – concern on
materiality, additionality and free additionality
riders Ireland – engineering
• Deemed savings lists and estimates tools
standardised calculation tools for
engineering estimates can greatly
facilitate ease of implementation by
OPs
M&V and QA Administrator • M&V procedures should be Ireland/GB – clear M&V
(principles established by both the OPs and and QA guidance
defined by administrator documentation
Line Ministry) • This should be supported by Quality
Assurance (QA) requirements for
accrediting/certifying firms and
6 Selection of an appropriate entity to act as the scheme administrator is discussed further under Pillar 2
7 Regulatory Impact Assessment
5materials for eligibility in the
scheme.
Enforcement Government • Buy-out provisions and/or penalties Ireland/Slovenia/Austria
or are necessary for scheme scale-up – moved from voluntary
Administrator from voluntary set-ups to formal EEO with buy-
• Ensure they are sufficient to out option
incentivise OPs to act, proportionate, Bulgaria – example of
transparent and predictable insufficient incentive and
• Payments should to the extent lack of empowerment
possible be retained within the EE GB – penalties remain in
sector EE sphere
• Clear empowerment of enforcement
body and process for collecting
penalties
Methods for Administrator • OPs should be able to generate Denmark/GB/Ireland –
generating and (principles energy savings certificates both by enabling inter-OP trading
trading defined by themselves and through contractors France – platform for
certificates Line Ministry) (third parties) smaller players
• Third parties may also be permitted Italy – use of White
to generate certificates although full, Certificates created
open trading adds complexity and is complexity and concerns
not recommended in initial stages on windfall returns
Sub-targets Line Ministry • Ring-fencing a proportion of savings Ireland – ring-fencing for
and ring- from residential sector addresses residential and low
fencing stronger barriers among these income
consumers France – bonus to
• Ring-fencing or providing savings from low income
preferential credit to low income groups
actions can help address regressive GB – sole focus on low
nature of EEO scheme income
Slovenia – perceives
better dealt with by EE
Fund
Key challenges related to translating legal environments, cost-pass through provisions
framework for EEOs in EBRD COOs and must be explicitly enabled in the legal
Energy Community Contracting Parties framework. The ‘cost’ to consumers therefore
becomes more visible than the benefits
Cost-recovery mechanisms have been noted derived from the scheme and thus politically
as a particular challenge in the countries difficult. This is particularly the case in many
covered by the report. In many markets where EBRD COOs where energy tariffs have
EEOs have been rolled-out, the electricity historically received subsidy support,
market is liberalized meaning that costs regulated margins are tight and consumers’
incurred are treated as a cost of doing disposable income is comparatively low. But
business by the OPs and may be passed on cost-recovery pathways are essential for an
to consumers to the extent competitive EEO scheme to be viable. European EEO
conditions allow. The cheaper the target is schemes have typically represented up to 2%
delivered, the lower the pressure on an OP to of retail tariffs 8 . While this is a small
increase costs. In regulated tariff proportion of overall energy costs and is
8
https://ec.europa.eu/energy/sites/ener/files/documents/final_report_on_study_on_costs_and_benefits_
of_eeos_0.pdf
6vastly outweighed by the estimated benefit, it The responsible body for the administration
is important to remember that most supplier and first layer of enforcement of an EEO is
costs are pass-through elements (ie typically either a relevant government
wholesale energy, network tariffs and taxes). ministry, a semi-independent energy agency
The uplift to tariffs therefore represents a or an independent energy regulator. A good
much larger percentage of supplier costs and practice approach would be to ensure a
profits. To be financially viable to implement degree of separation between the policy
will require the affected entities to recover setting and policy implementing bodies with
associated costs. either an agency or independent regulator as
the key administrative and monitoring body.
Another element where issues have been
observed in the region is the design of penalty The scheme administrator will be responsible
schemes, and giving a clear, legal basis for for ongoing operational tasks to ensure the
issuing penalties in case of non-compliance EEO scheme runs effectively and smoothly.
that will incentivise OPs to deliver. In newly These will include the vital task of collecting,
liberalized / liberalizing electricity markets approving and accrediting claimed savings as
with weaker regulators, as is frequently the well as undertaking/directing related
case in the countries under consideration auditing requirements. The administrator will
here, this is particularly important as non- have to report at least once a year to the
compliance will quickly harm scheme government and publish information on
credibility. scheme progress (costs and volumes) and
detail any problems encountered.
The low institutional capacity also has
repercussions for the strength of the M&V One further important task is the
regimes established. In each of the countries development and maintenance of non-
where an EEO scheme is operational – legislative documentation necessary for
Poland, Slovenia and Bulgaria – some scheme operation. This includes process and
concern regarding M&V processes has been technical guidance, pro forma templates for
cited. Clear guidance on accreditation, evidencing and submitting claims, and
requirements and the capacity to undertake maintenance of a centralised database for
necessary sampling checks (both by the OPs their processing. The administrator may also
and by the administrator) on claimed savings assist OPs by providing supporting tools for
are important if confidence is to be gained in calculating energy savings (eg deemed
the schemes’ effectiveness. A list of energy lists or spreadsheets for calculating
measures with deemed energy saving values scaled savings).
can help this process by simplifying the M&V
process while retaining transparency. While an extensive array of responsibilities,
the resourcing requirements for the above
3.2. Component 2: Scheme tasks should not be overly onerous. Ongoing
administration costs for a typical EU country may include one
EEO schemes require the development of full-time equivalent technical expert and one
administrative capacity in the form of full-time equivalent administrative staff.
appropriately skilled staff and supporting Verification would most likely be contracted
documentation, and tools to ensure the to an outsourced panel of verifiers (and must
processes are in place for effective be done independently of the OP). Additional
governance. This will cover accreditation, support, possibly contracted in, will be
auditing and scheme monitoring among required for development of the necessary
other aspects. regulations and guidance documents as well
7as setting up of the information and The following table seeks to summarise the
communication technology to enable key elements to EEO scheme administration,
efficient administration (through web-based best practice considerations in their
submissions). There will be ongoing application and useful examples of such
maintenance costs for this also. application.
Table 2: Summary table of components related to administration of an EEO scheme
Component Typical Best practice considerations (success Country example
responsible factors / potential pitfalls)
Guidance to Administrator • “Plain English” interpretation of Ireland – provision of
OPs on legislation to clearly lay out the clear guidance
scheme scheme approach and documentation
operation responsibilities
• Clearly define target setting
process, principles of operation,
timelines, credit allocation,
process for accreditation, penalties
and buy-out rules
Technical Administrator • Stipulate the certification or UK – provides easily
guidance on (technical accreditation standards necessary accessible and clear
M&V and QA support may be for suppliers (and how to check for information on expected
requirements contracted) these) processes and standards
• Lay out the monitoring and
verification processes that must be
set up and followed by measure
category (with derogations)
• Reporting requirements to
administrator
Deemed Administrator • Should cover common, replicable France / Ireland /
energy saving (technical large-volume measures Slovenia – provide
credits table support may be • Based on proven and deemed energy savings
contracted) independently verified energy lists for common
saving values measures
• Accompanied by technical
standards and updated
periodically
Calculation Administrator • Simple to follow spreadsheets for Ireland – online tools to
tools for (technical estimating energy savings support “scaled savings”
scaled support may be • Useful for measures such as estimates for common
savings contracted) electric motors in industry industrial measures
Appropriate IT Administrator • Specification and procurement of Croatia – centralised M&V
systems necessary software Platform embedded in
• This may be tied to centralised regulations for use on all
M&V database for all EE measures NEEAP policy measures
Pro forma Administrator • For use by OPs to demonstrate UK – online templates of
template proof of involvement necessary documentation
Cost reporting Administrator • Monitoring cost impact of the Denmark – cost reporting,
scheme as well as impact on benchmarking and
competition reviews undertaken
• May include a periodic update of annually
RIA
• Information may lead to revision
for next compliance period
8Trade Administrator / • The administrator should provide Ireland – clear process for
facilitation other simple processes for notifying of inter-OP trading
any inter-OP trade of certificates Italy / Poland – exchange-
• If third-party certificate generation based trading of White
is allowed then a trading platform Certificates
may be considered
Key challenges related to implementing EEO need to be based on robust and
scheme administration in EBRD COOs and independently verified analyses which may
Energy Community Contracting Parties also be lacking.
EEO schemes within the EU, according to 3.3. Component 3: Obligated parties
several experts that provided experiences delivery mechanisms / business models
from Member States during the course of This covers the Obligated Party strategy for
preparation of the guidelines, have frequently EEO implementation. The envelope of options
benefited from being run by arms-length for addressing these issues will be led by the
agencies (either focused on sustainable legislative framework of the scheme but
energy or more general in nature) who are there will typically be a number of eligible
able to operate with greater flexibility and approaches and indeed a variety have been
independence than a ministry. Such agencies tested in EEO schemes to date.
are seen as more responsive to the demands
of OPs and can help foster a collaborative EEO schemes often meet resistance from the
working arrangement. However, in many OPs during their proposal and set-up stages.
EBRD COOs as well as in the Energy Such resistance tends to be driven first and
Community, the presence or willingness to foremost by concerns regarding recovery of
support establishment of such an agency is costs (and potential to be at a competitive
lacking, while support is also lacking to disadvantage9). Other key concerns relate to
dedicate the necessary resources within the the lack of experience of OPs in the energy
civil service to scheme establishment and efficiency sector (particularly in the Energy
operation. This has slowed decision making Community) and the potential to cannibalise
and development. their own revenues by lowering demand for
energy.
The lack of supportive documentation,
notably a deemed energy saving list, has also Experience in operating EEO schemes in the
proven problematic in some jurisdictions. EU suggests the predominant delivery
Reference to such a list provides mechanism has been grant financing. See
transparency and simplicity, substantially box 1 for examples below.
reducing the administrative burden on OPs.
The deemed savings contained in such lists
9 Concern has been voiced in a number of EEO and providing unfair advantages to smaller
schemes regarding minimum threshold levels for players, while low thresholds have proven
energy sales volumes below which retailers are problematic for very small entities lacking
not obligated under the scheme. Relatively high capacity to cope with the administrative burden.
levels have been cited as distorting the market
9Box 1. Business models for EEOs
Directly by the OP who installs the EE measure itself (possibly via a subsidiary unit);
Provide to a third party contracted by the OP to install an EE measure;
Paid by the OP to a third party in exchange for an energy saving certificate either over-the-counter
(OTC) in a bilateral deal or on a platform/exchange.
10The third party has in some jurisdictions been “MUSH” (municipalities, universities, schools
an Energy Services Company (ESCO) who and hospitals) sector.
then delivers the energy savings measures
using forms of Energy Performance Beyond EEO schemes, the general
Contracting (EPC) or loans at concessional experience of energy efficiency loan
rates (with the concession being supported programmes is that results are weak
by the grant funding of the OP). (particularly those targeting small
consumers) unless they are combined with
Cost recovery of the grant support usually technical assistance, outreach programmes,
takes place in the year of delivery either mechanisms to ease contracting and the
through an allowance in regulated tariff aforementioned softening of financial
setting or in price-setting by the OPs as part conditions to accelerate uptake. Without
of their cost of doing business in a liberalised such efforts, they risk merely repackaging
tariff environment. Both approaches reduce activities which would have taken place in the
the strain on OP cash flows beyond any initial market anyhow.
set-up costs.
It is plausible that loan type arrangements
While permitted under many EEO schemes, could reduce the costs of an EEO scheme for
loans have not formed a significant delivery OPs, softening the impact on tariffs and
mechanism. In a number of non-European improving political willingness (a key concern
schemes (eg Brazil, some US schemes and among EBRD COOs) to implement. However,
South Africa), EEO schemes have been used the lessons learnt from wider EE
to provide financial assistance to ESCOs as concessional loan schemes – particularly
described above but the OP contribution still those targeting lower cost measures – need
takes the form of a grant to the ESCO rather careful consideration and mitigation
than a direct financing offer. Activity derived strategies. Also on this matter is the need for
from this approach has focused on the capitalisation of the financing entity to
manage cash flow in the early years.
Table 3: Summary table components related to EEO scheme delivery by OPs
Component Typical Best-practice considerations (success Country example
responsible factors / potential pitfalls)
Engagement OP / • Engagement of OPs through Ireland – Better Energy
Administrator previous EE schemes (voluntary Scheme and involvement
EEO or other) builds mutual of utilities
understanding Greece – early
• Early engagement develops EE engagement and
competency within OPs collective planning
Understanding Administrator • Prior to and in the initial stages, Austria – extensive
of the scheme run a series of workshops with OPs workshop programme
operation • Back up the guidance document
with details for dedicated contact
point in administrator
• Clear website
Developing OP • OPs should have a staffing plan for
administrative delivery of obligation
capacity • Must have capacity for
implementing M&V processes
11Internal Action OP • This may be a formal element of France – formal Action
Plan for scheme (approved by Plans which may be
delivery administrator) or an internal approved by
document administrator,
• Identify business model for streamlining
delivery – internal/subsidiary, accreditation
contracted, purchased (WC or buy-
out), pooled
• Scheduling of roll-out
Choice of OP • Main options are: grant support, Ireland – explicitly allows
delivery soft loans, technical assistance 4 options but
mechanism(s) • Cash flow considerations need concentration on grants
addressing
• Financing support can be
channelled through an ESCO
Financial Private sector • Financing of OPs is important, as Bulgaria – focus on loans
products for / IFIs / utility capital may be already and lack of cost-recovery
OPs national stretched mechanisms hindered
development • Cost of financing needs to be utility financing
banks taken into account when
evaluating cost-recovery
mechanisms
Product Administrator • Deemed savings list profit New South Wales – had
innovation retention can result in narrow concerns of narrow focus
focus on simple, low cost on low cost measures so
measures tweaked rules
• Incentives may need consideration Italy – enabled windfall
to bring forward more innovative gains on CFLs10
and deep solutions
10 Compact Fluorescent Lamps
12Key challenges related to EEO scheme Contracting Parties is substantial. Extensive
delivery by OPs cost-effective potential is available for energy
efficiency within the region. EBRD COOs and
In the countries of the region, utilities lack Energy Community Countries which have
technical capacity / experience on starting an already attempted to implement EEO
EE business line, and often lack upfront schemes have done so with mixed success.
capital to undertake measures (which would Therefore, to assist in more consistently
then be repaid through tariff cost-recovery). effective roll-out, this report aims to support
the region by learning not just from global
Successful EEO schemes have been
best practice but also from lessons learnt in
introduced gradually with rigorous pre-
overcoming the particular challenges
implementation planning between both the
common to the region and in doing so provide
administrator and future OPs. Such planning,
a useful tool for their future development.
as occurred recently in Greece, helps bridge
the knowledge and capacity gap that faces The longest running EEO scheme among
many potential OPs in the region by helping EBRD COOs is that of Poland which
provide a clear picture on how targets may be underwent significant revision in 2016. The
achieved in the initial stages of the scheme. original scheme, commenced in 2013, was
The pressure to comply in a timely manner perceived to be overly complex, depending
with the obligations of the EED should be upon annual tender rounds, categorisation by
balanced with the need for such a robust sector, and open trading. The new scheme
planning period. design bears closer resemblance to that seen
in other newer EU Member State EEOs such
If a cost-recovery mechanism through tariffs
as Ireland, Austria and Slovenia, albeit with
is not possible then this constrains the range
the inclusion of open trading. It is noticeable
of delivery models significantly. Only in very
that the level of savings achieved even under
mature markets would it be possible for an
the old design had increased substantially by
energy supplier to put in place a profitable
2015, indicating that the time required for
business line for EE. Under these
learning by both OPs and the administrator
circumstances, EEOs will be viewed as eating
were as important a barrier as the scheme’s
into profits, and will meet resistance from
complicated design.
utilities. Cost-recovery modalities heavily
influence business model choice. This finding is supported by the largely
successful implementation in Slovenia which
Monopoly providers remain in place within a
built gradually upon a pre-existing levy placed
given fuel source (particularly for electricity)
on energy tariffs for funding energy efficiency
in many EBRD COOs. This can dilute the
activities through the centralised “Eco-Fund”.
market benefits to be gained from the
By increasing the EEO target in steps and by
competitive nature of EEO schemes that arise
virtue of the precedent set by the levy,
in liberalised environments.
Slovenia managed a relatively smooth
4. Perspective on EEO scheme introduction of its EEO. Nevertheless, it
remains noticeable that the only year where
roll-out in EBRD and Energy the target was not achieved directly by the
Community region OPs (as opposed to indirectly using the buy-
4.1. Experience to date out mechanism) was the first year of 2014,
As identified in the introduction to this report, despite 2014 having a lower target than
the opportunity for EEO schemes within the subsequent years. This reaffirms the
EBRD COOs and Energy Community importance of gradually growing the target.
13Bulgaria originally intended to commence its Challenges in scheme establishment and
EEO in 2014. However, delays caused in part legislation
by changes in government (an issue also At a high level there is the issue of
encountered elsewhere in the region) set international obligations. Targets for most
back its formal initiation to 2017. Further EBRD COOs are set, at least in part, by
difficulties with a lack of understanding reference to the demands of Article 7 and
among OPs regarding responsibilities and Annex V of the EED (as transposed for the
opportunities, and the absence of effective Energy Community) which are uniform across
enforcement and cost-recovery mechanisms, all EU Member States.
have hindered its progress.
A number of successful EEOs in the EU have
Elsewhere in the region, the other operational been able to build upon either pre-existing
EEO schemes in Greece and Latvia have schemes or well-established energy
been implemented too recently to draw firm efficiency policy mechanisms, with the
conclusions regarding their operation. It is corresponding institutional knowledge,
noticeable, however, that both have adopted experience and capacity already established
scheme structures broadly similar to that of to support implementation and operation.
Slovenia (as well as the successful schemes Such capacity and experience is more
run in the Republic of Ireland and Austria). frequently lacking among policy makers,
Croatia’s proposed scheme following revision administrators and OPs in the EBRD COOs
is similarly aligned to this increasingly and Energy Community CPs, providing a
common format within the EU Member States particular challenge for establishing and
(eg an obligation placed on retailers, a broad operating a new EEO scheme. With the 2020
base of fuel carriers covered, and a buy-out deadline now fast approaching, policy design
option to a centralised National Energy for new EEOs is best advised to turn its
Efficiency Fund). attention to the 2030 policy environment,
ensuring a long-term perspective is taken on
No schemes are as yet operational within the scheme design and development. The
Energy Community with only Bosnia and alignment of EEO schemes with Alternative
Herzegovina so far indicating a firm Measures, as permitted by the EED, is
commitment to establishment, while other discussed further below.
Contracting Parties continue to assess their
options. Public and consumer cost is another area of
clear and repeated concern. Again, while a
4.2. Common challenges common issue internationally, the lower GDP
Most challenges to setting up a robust EEO per capita and income levels of the EBRD
scheme are common to all jurisdictions and COOs and Energy Community Contracting
have been tackled across the world. Parties as compared to other EU Member
Extensive literature is available regarding States, lends increased prominence to the
options for scheme design and best practice issue. This impacts in a number of ways.
implementation. However, there are Firstly, financial capacity may be lacking in
commonalities across the EBRD COOs the government and designated
regarding the form and relative importance of administrator for dedicating the necessary
certain challenges which merit specific human resources to both scheme
comment here. establishment and operation, as well as to
ensure the required expertise is available for
it to be designed and implemented
consistent with international best practice.
14There can also be strong opposition to the Enforcement mechanisms for the payment of
notion of cost recovery via energy tariffs. the buy-out price and/or penalties for non-
Prices for households and small businesses payment have also been lacking or proven
in the region for electricity in particular difficult to establish within the legislative
remain low by international standards, are frameworks. Without credible and effective
largely regulated, and have a history of enforcement policies, OPs will likely not be
subsidisation. This has a double impact by: sufficiently incentivised to act. Slovenia
provides a positive example of where clear
• reducing the end-user’s savings from enforcement occurs with late payment to the
implementing EE measures on energy Eco-Fund of any shortfall subject to interest
expenditures (thus increasing the pay- and legally enforceable. Penalties are also
back period required); and proportionate to the infringement which has
• increasing the uplift to tariffs required as occurred.
a percentage of total bills.
Challenges in scheme administration
Regulated tariffs provide an additional Related to the above challenges is the issue
complication due to the inevitable political of selecting an appropriate administrator for
nature of agreeing to price rises, which can the scheme. The most common approach
result in very tight profit margins for utility among EU countries, which has had a good
firms. Combating the cost issue is difficult but level of success, is the use of an arms-length
surmountable. The scale of cost-effective energy agency (sometimes dedicated to
opportunities for EE activity is vast and by sustainability matters). Agencies generally
spreading the obligation across energy have greater flexibility in the hiring of staff,
carriers the impact on tariffs can be are partially protected from day-to-day
contained, albeit at the cost of greater political pressures, and have proven better
administrative complexity. It is important also able to foster a cooperative environment with
that the substantial benefits (both direct and OPs. However, setting up such an agency can
indirect) of EEO schemes are as visible to encounter opposition, particularly in the
both politicians and the public as the cost. EBRD COOs where cost and lack of political
EEO schemes are highly cost-effective in control cause concern. Early planning and
aggregate for society but this message is coordination with other areas of energy
often lost. legislation as well as the ministry responsible
for finance can help overcome this hurdle. In
Similarly under regulated tariffs, cost-
the absence of such an agency, the energy
recovery mechanisms must be implemented
market regulator or directly within the
with the involvement of the energy regulator.
ministry are alternative options for
EEO schemes represent a small proportion of
administration.
overall retail tariffs (typically no more than
2%) but a much larger proportion of utility A common challenge in the region, including
profits. Without cost recovery allowances, in Poland, Slovenia and Bulgaria, has been
financial distress or non-compliance is establishing robust monitoring and
inevitable. Standard regulatory practices verification systems. Administrators have
including close oversight, benchmarking, and relied largely upon desk-top document
performance-based incentive mechanisms reviews as opposed to physical inspections,
can be used to incentivise cost efficiency in leading to concerns regarding the veracity of
such circumstances. claims. GIZ, through its Open Regional Fund
(ORF) for South-East Europe, assisted in the
roll-out of M&V software platforms to the
15countries of the Western Balkans region. OPs are often concerned about conflicting
Croatia integrated the system within its incentives stemming from their position as
national legislation and it is planned to be energy sales businesses being obligated to
used for the new EEO scheme. However, the reduce energy consumption. Allowing OPs to
system is understood to yet to be put into full initiate savings in any end-use fuel type
operation in any of the remaining recipient means it is not necessarily the suppliers’ own
countries. Appropriate IT systems are an sales which are affected. Furthermore,
important cornerstone of managing an delivery of energy services is being
effective EEO scheme. increasingly seen by retail firms as a potential
growth area for their businesses and
Challenges for Obligated Parties therefore the positive potential of EEOs to
A lack of understanding of EE potential and contribute towards this shift in focus needs
appropriate measures has been a repeated emphasising. For network firms the same
concern expressed by potential OPs across a concern will depend on whether tariffs are
number of proposed and operational EEOs in formulated on an energy (kWh) basis or a
EBRD COOs. Many OPs do not have a history capacity (kW) basis and will anyhow be
of involvement in EE programme delivery and partially mitigated in markets where tariffs
lack the internal capacity and know-how for are decoupled from throughput volumes (ie
seeking and identifying cost-effective using a total revenue rather than a price cap).
opportunities. Strong coordination and Similar decoupling mechanisms can help for
communication between the administrator retail firms in markets where retail prices
and OPs prior to scheme establishment, with remain regulated.
information sharing regarding EE potential
can help mitigate this challenge. Working Lastly, the market size of EBRD COOs is
with industry associations, particularly for the typically smaller than those of EU Member
liquid and solid fuel sectors where there is no States with the longest running EEO
ongoing relationship with end-users, is schemes. Particularly in markets where a
another option which has proven beneficial in monopoly provider’s position is unlikely to be
Ireland and Denmark. challenged, a more collaborative and
prescriptive approach between government
EBRD COOs are also typically at an earlier and OPs in scheme design, planning and
stage of energy market liberalisation than the delivery, such as is the case in Malta and
wider EU Member States. The presence of Lithuania, could be a workable solution.
regulated tariffs and monopoly providers can
dilute the benefits to be gained from 4.3. Recommendations for getting
competition that an EEO scheme can offer. In started
a competitive retail market EEO costs are Based upon the above discussion of common
treated as a cost of doing business and there challenges, the following recommendations
is a clear incentive for cost efficiency in order are drawn for EBRD COOs to get started with
to gain market advantage. This incentive is an EEO scheme:
absent under regulated environments.
Nevertheless, this issue alone should not be Be realistic on scope and timetable: Policy
seen as an insurmountable barrier to makers should take heed of the region’s
delivery. Indeed the success of schemes experience by putting in place a realistic
placed on network firms, which are inherent timetable for scheme development and
monopolies within their region/fuel, attests implementation. Starting with a target at a
to the flexibility of EEOs as a policy tool. realistic level before growing over
subsequent years is a proven method of
16improving outcomes, while softer penalty obligations and processes, simplified
regimes and/or voluntary arrangements can calculation processes (eg through
also be used to smooth the introduction. establishing a list of common measures with
Taking time to ensure the legislative deemed energy savings), pro forma
framework is well structured, focused on the templates for submitting claims and
long-term objectives of the country, and transferring credits between OPs, and
comprehensive in scope, will also pay-off in supporting IT systems, are all essential
the long-run. ingredients to a well-functioning scheme.
Consider related alternatives (perhaps for a Regular reviews are necessary: With the best
transitional period): Schemes which co-opt will in the word, all scheme designs will have
energy firms for delivery but in a more areas of potential improvement that will only
managed manner such as in Flanders, become apparent once in operation. Periodic
Lithuania and Malta may lose some of the reviews (around every 3 years) are therefore
competitive element but provide a simpler recommended to update processes as
administerial arrangement. This can be necessary and update or fine-tune areas
attractive for a transition period or in a small which need attention.
market where competition is anyhow unlikely
to become established. Back-up the obligation with effective,
proportionate and dissuasive penalties:
Early engagement of the Ministry of Finance Despite the potential of voluntary
and energy regulator are essential: EEOs mechanisms for smoothing the introduction
have strong net benefits and are a cost- of a new EEO scheme, achievement and
effective delivery mechanism of EE compliance at scale is likely to necessitate
measures. However, energy bill increases are the introduction of a penalty regime. The
always a politically sensitive subject and basic principles of such a regime are that
therefore early engagement of entities with incurring a penalty should be more costly for
jurisdiction on financing matters is essential the OP than complying with their obligations,
in order to ensure they are fully informed as that the size of the penalty is proportionate to
to the scheme’s proposed operational the size of the breach, and that funds
structure and its expected benefits. recovered through penalties should remain
within the energy efficiency sphere.
Early engagement of Obligated Parties is also
essential: There is a general lack of
experience among utility firms in the EBRD
COOs in EE matters. Concern over EE
potential and how to identify suitable
opportunities is a common occurrence.
Holding a series of stakeholder workshops to
address these concerns, share information,
and establish action plans for early stages of
scheme roll-out prior to its commencement
are recommended mitigation actions.
Pay specific attention to M&V and the
development of supporting documentation:
Good quality guidance documentation
regarding scheme operation and M&V
175. EEOs place in the policy buy-outs to National Energy Efficiency Funds
availed by Obligated Parties in markets where
measure mix for meeting the
this is an option. The buy-out price is typically
national energy savings target based upon the cost to the Fund of
provided in EED Article 7 undertaking equivalent energy saving
5.1. The contribution of EEO schemes activities. Hence the low uptake indicates
towards the 2020 Article 7 obligation Obligated Parties predominantly find ways to
Close to 500 different policy measures were achieve savings at lower costs themselves.
notified by EU Member States to the This finding is to be expected given the
European Commission for the purposes of structure of EEO schemes is intended to
meeting their Article 7 energy savings encourage competition.
obligations11. In addition to EEO schemes and
Due to their cost-effectiveness, the increase
National Energy Efficiency Funds, these
in the uptake of EEO schemes among
policy measures can be defined using the
Member States seen in response to Article 7
(non-exhaustive) list of categories given in
obligations for 2020 may be expected to
Article 7 Paragraph 9:
continue in the period to 2030.
• Energy or CO2 taxes Nevertheless, few Member States or
• Financing and fiscal schemes Contracting Parties are expected to pursue
• Regulations their Article 7 obligations solely via an EEO
• Voluntary agreements scheme (only Denmark and Luxemburg aim
• Standards and norms to do so for 2020). This leads a policy maker
• Energy labelling schemes to consider how to select the most suitable
• Training and education programmes mix of Alternative Measures alongside an
EEO scheme.
Despite this variety in the types of policy
measures used by MS to contribute towards 5.3. Selecting an effective and
the Article 7 obligations, EEO schemes are coherent policy mix for Article 7
expected to be the category which provides For 2020, the majority of non-EEO measures
the largest single contribution in terms of notified by EU Member States had been pre-
energy savings12. existing at the time of adopting the EED or are
adaptations of existing measures 13 . This
5.2. The future role of EEO schemes in lessens the burden on savings to be borne by
the Article 7 policy measure mix a new EEO or other major Alternative
The prominent position of EEO schemes in Measure and the associated uncertainty of a
the wording of Article 7 has been retained for new scheme. Inevitably, the policy mix
the amended EED, extending the obligation chosen by individual Member States or
to 2030, as recommended by the Contracting Parties is also influenced not only
corresponding impact assessment. This is by the location of the most cost-efficient
largely due to their relative cost-effectiveness
– a point evidenced by the very low use of
11All such notified savings must comply with the 13 See:
requirements of Annex V of the EED http://enspol.eu/sites/default/files/results/D3.
12 1%20Report%20on%20Alternative%20schemes
http://www.europarl.europa.eu/RegData/etudes %20to%20Energy%20Efficiency%20Obligations%
/STUD/2016/579327/EPRS_STU(2016)57932 20under%20Article%207%20implementation.pdf
7_EN.pdf
18energy saving potential but also by climatic, efficiency in translating the direct costs
political and cultural considerations. involved into energy savings and who is
to bear these costs.
The ability to select an optimum policy mix • The complementarity or potential overlap
from a cost-efficiency perspective can be of the policy option with other policy
further hampered by the lack of reliable data options; some measures complement
on the costs and benefits of many measures, each other to a greater extent than
lack of foresight on unintended others.
consequences, and multiple policy
• The sensitivity of the option to political
objectives. Nevertheless, consideration
and cultural acceptance and its stability
should be given as to the complementarity of
in terms of sustained funding.
the policy options selected and whether they
• Difficulties in verifying the energy savings
are mutually reinforcing, or conversely
(a particular difficulty for energy taxes)
overlap in application and thus risk delivering
and ensuing the eligibility of the option for
less than the sum of their individual impact.
meeting Article 7 targets.
Overlapping policies can result in double
• The complexity of the policy option.
counting of energy savings (which must be
eliminated as required by EED Article 12) and Labelling, information campaigns and
potential over-compensation to recipients14. training, as well as minimum performance
standards, will continue to provide an
Criteria to consider in the selection of an
essential role in bringing forward energy
appropriate policy mix include:
savings via improving the efficiency of
• Whether they address the specific markets and addressing the issue of late
barriers identified in the market in adoption. However, it is the EEO schemes,
question. other financial and fiscal measures (including
• Their scalability in delivering energy auctions), energy or CO2 taxes and voluntary
savings: i.e. the degree to which the agreements, which will bear the heavy lifting
option has been proven, or can of delivering energy savings under Article 7 by
reasonably be expected, to deliver a aligning with its core objective of improving
significant quantity of energy savings. the rate at which upgrades occur.
• The market transformation potential of Careful crafting of these schemes will allow
the measure: will it act as a “pull” on the them to work together in concert, delivering
rate of market change as an EEO does, or energy savings at sufficient scale to meet
does it address late adoption as with targets, across end-use sectors, and with due
minimum performance standards? consideration of distributional effects.
• Cost-effectiveness: noting the cost of
administering the policy option, its
14For a full discussion on the considerations in http://enspol.eu/sites/default/files/results/D5.
designing a policy mix for meeting Article 7 1Combining%20of%20Energy%20Efficiency%20
objectives, see the EU-funded ENSPOL project in Obligations%20and%20alternative%20policies.p
report D5.1 “Combining of Energy Efficiency df
Obligations and alternative policies”,
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